Investment knowledge enhanced by collaboration
Published April 9, 2013
The opportunity to invest in International Lease Finance Corp. came about in the aftermath of the financial crisis when ILFC’s parent company, insurance firm American International Group, was deemed "too big to fail" and received a $182 billion government bailout. The association with AIG had typically been considered a strong suit for Los Angeles-based ILFC, which issued its own debt but relied on the higher credit rating of its larger parent to help keep its financing costs lower. However, when ratings agencies downgraded AIG's credit in 2008 in advance of the company’s bailout, ILFC was also negatively impacted.
"The airline industry was doing well despite the downturn, and by working with the insurance analyst, I was able to better understand that industry and how it fit in with airlines. As a result, we developed a view different than that of the market and made the investment."
Collaboration leads to broader approach
Eventually, the airline leasing company ran into its own liquidity problems, as a result of financing long-term assets with short-term liabilities, which required frequent refinancing and continuous access to bond markets. ILFC's bonds dropped precipitously, trading near 50 cents on the dollar as liquidity issues mounted. This piqued the interest of airline analyst Tara Torrens, who began evaluating the investment opportunity with her insurance analyst counterpart who covered AIG. Even though Tara hadn't directly covered ILFC, she was familiar with the airline industry and knew how the leasing process worked. In collaborating with the insurance analyst, who provided his views on ILFC parent AIG, she was able to take a broader approach and better understand the investment opportunity.
"We started investing in the bonds of ILFC on the view that the company's core fundamentals were good and its asset base was solid in spite of the issues at AIG," recalls Tara. "The airline industry was doing well despite the downturn, and by working with the insurance analyst, I was able to better understand that industry and how it fit in with airlines. As a result, we developed a view different than that of the market and made the investment. We concluded that regardless of the outcome, our investment in the bonds was protected by the value of the company’s business."
Indeed, the investment in ILFC bonds, which were yielding about 15% at the time, has paid off and the fund has since sold most of its position in the bonds, now yielding around 5%. American High-Income Trust® President David Barclay commends the investment and the collaboration between Tara and the insurance analyst. "AIG was thought of as the better credit; then the roles reversed and ILFC looked better than AIG," he says in recalling the circumstances that allowed for the investment to be made at the height of the financial crisis. "The price became attractive for ILFC bonds and because of our ability to collaborate and approach the investment from different angles, the crisis at AIG provided us with the opportunity to make the investment."